High-earning doctors, insurance agents, and lawyers who avoided paying their due taxes have been dealt a heavy blow by the Inland Revenue Authority of Singapore (IRAS).

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According to the Straits Times (ST), IRAS has managed to recover almost S$10 million in unpaid taxes from the last four years.

Out of this group of high-earners, more than 20 doctors and dentists have paid S$3.6 million to IRAS. Some of them had previously avoided paying full taxes by forming shell corporations to claim corporate tax breaks.

Another S$6 million was recovered from another 60 lawyers, tutors, renovation contractors, insurance agents, and property agents.

Why did these doctors form shell corporations?

According to ST, IRAS increased the highest personal income tax from 20 to 22 per cent effective in YA2017. Previously in YA2010, corporate tax went down from 18 per cent to 17 per cent.

New start-ups can also enjoy tax-exemption for up to three years.

Because of this, IRAS began to pay closer attention to the tax returns of high earners, as the changes would affect them the most.

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The tax difference in personal income tax and corporate tax on income above S$500,000 can be as high as S$27,000.

In the words of the assistant commissioner of the individual income tax division, Mr Andy Seah, these changes might push high income individuals to “avoid taxes through corporatisation and arrangements lacking in commercial substance”.

For such shell companies, IRAS is empowered to take away the tax advantage and claim back whatever tax amount is due.

Reminder to medical professionals not to avoid tax

In fact, IRAS published an article in the Singapore Medical Association’s (SMA) April issue, reminding medical practitioners of the proper way to file their taxes.

In it, it wrote that it believes “taxpayers are generally compliant and that most cases of non-compliance arise from negligence or insufficient understanding of tax matters”.

It then offered readers an opportunity to disclose past “non-compliance” voluntarily so that their tax avoidance penalties would be reduced under the Voluntary Disclosure Programme.

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Further down in the article, it then stated “Tax Avoidance” as a commonly encountered tax “mistake” made by medical professionals:

Here it is in full:

Tax avoidance arrangements

A tax avoidance arrangement normally involves an arrangement that is artificial, contrived or has little or no commercial substance. Such an arrangement is typically designed to obtain a tax advantage that is not intended by Parliament.

Some examples of tax avoidance arrangements observed by the comptroller include:

(i) Setting-up of more than one entity for the sole purpose of obtaining tax advantage;

(ii) Change in business form for the sole purpose of obtaining tax advantage; and

(iii) Attribution of income that is not aligned with economic reality.

The comptroller will disregard and make relevant adjustments to arrangements which are carried out with tax avoidance as one of their main purposes and are not for bona fide commercial reasons. For information relating to tax avoidance arrangements, please refer to The General Anti-avoidance Provision and its Application (First Edition) at https://goo.gl/3EZCwU.

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Tax avoidance is not tax evasion

For clarity, tax avoidance is not the same as tax evasion. In tax avoidance the taxpayer declares their full income earnings, but improperly claims various tax exemptions or breaks to avoid paying the full tax amount.

Tax evasion, on the other hand, is a crime where the taxpayer under-declares their earnings.

However, both have a similar outcome – the taxpayer does not pay their full fair share of taxes.